TMI Blog2013 (1) TMI 310X X X X Extracts X X X X X X X X Extracts X X X X ..... to suggest that volume of the relevant transactions also has to be taken into consideration for the purpose of computing such arithmetic mean. Therefore, it will be difficult to accept the stand of the assessee that weighted average arithmetic mean should be taken and not the simple average arithmetic mean. Thus CIT(A) has rightly rejected the stand of the assessee on this issue holding that there is no provision in the statute which allows taking weighted average arithmetic mean for determination of arm's length price. Adjustments claimed for marketing function, research functions and for differences in volumes - Held that:- As rightly contended by the assessee comparable uncontrolled price is required to be adjusted as per Rule 10B(1)(a)(ii) to account for difference, if any, between the international transaction and the comparable uncontrolled transaction which could materially affect the price in the open market. However, as contended by the DR, a case has to be made by the assessee for allowing such adjustment duly supported by relevant facts and figures as well as documentary evidence. He has contended that such details and documents, however, need to be verified by the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recompute the disallowance to be made u/s 14A on some reasonable basis & also to consider the stand of the assessee that no expenditure was actually incurred for the purpose of making investment in shares so as to warrant any disallowance u/s14A. - IT APPEAL NOs. 3077 (MUM.) OF 2009, 1236 (MUM.) OF 2010 - - - Dated:- 14-9-2012 - D.K. AGARWAL AND P.M. JAGTAP, JJ. A.V. Sonde for the Appellant. Ajit Kumar Jain for the Respondent. ORDER P.M. Jagtap, Accountant Member - These two appeals filed by the assessee against two separate orders of learned CIT(Appeals)-19, Mumbai and learned CIT(Appeals)-15, Mumbai dated 19-02-2009 and 01-12-2009 for assessment years 2003-04 and 2005-06 respectively, involve some common issues and the same, therefore, have been heard together and are being disposed of by this single consolidated order. 2. First we shall take up the appeal of the assessee for assessment year 2003-04 being ITA No. 3077/Mum/2009 which is directed against the order of learned CIT(Appeals)-19, Mumbai dated 19-02-2009. 3. The common issue involved in ground Nos. 1 to 9 of this appeal relates to the addition of Rs.2,13,25,474/- made by the AO and confir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of short charge of brokerage. 5. The assessee submitted its reply dated 20-1-2005 wherein the following points were mainly raised : (a) the rate does not differ on account of classification of the customers, the rate differs on various other factors such as volume of business, expected future business, marketing efforts, credibility of customer, negotiation power of the customer, to capture market share. Accordingly, the company would commercially be keen to charge a lower rate to a customer having low volume of business in anticipation of future business, build client relationship. (b) the turnover from the AE constituted 42.7% of the total turnover and its total turnover and the volume of business procured is not comparable with that from third parties. (c) the AE of the company has snot used the services of any other broker in India and given their entire business to company on an exclusive basis. (d) even the comparison with third party brokerage rates then due consideration should be given to the volume of business transacted and the fact that company acts as an exclusive brokerage, (e) It also cited OECD Guidelines to highlight that CUP was not applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts the pricing of the services. (d) Marketing forces and competition: The TPO held that adjustments would be made as the FIIs were trading through the company and other brokers are ready to pay the higher brokerage than paid by the AEs. The payment of such brokerage of FIIs takes into consideration, the competitive rates offered by the other brokers and the rates paid by them are determined by the market forces. The company is undertaking trades for AEs and foreign FIIs, who are operating from the similar geographical regions, without being present in India, their perception of the Indian Market in terms of risks and rewards would be the same. Considering all these above factors, the TPO was of the view that there was no material difference and so rejected the contention of the appellant that CIP method was not the most appropriate. The TPO further was of the view that, in this case, the internal comparables area available and since the date maintained by the appellant company for such uncontrolled transaction would be more complete and reliable than the data of independent enterprises selected as comparables by the appellant of TNMM is adopted. The TPO in its order has taken . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rate instead of weighted average. It was also submitted that the brokerage rates charged to Indian Financial Institutions should have taken into account by the TPO as the functions and risk were similar. It was pointed out that if this had been done, the average brokerage rate would have been 0.316% instead of 0.40% as worked out by the TPO. It was contended that the TPO committed a mistake in assuming that market and sales efforts were required also in respect of transactions executed for AEs and thereby granting a lesser adjustment on account of marketing and sales effort at 0.048% as against 0.07% as claimed by the assessee. It was pointed out that the total marketing cost of Rs.2,80,37,910/- considered by the TPO while computing the marketing cost adjustment comprised of the salary and related cost of two employees whose role was restricted only to interacting and maintaining relationship with the third party clients. According to the assessee, the TPO also committed a mistake in not allowing adjustments on account of research function undertaken by the assessee in providing services to third party clients for its CH trades. It claimed that such adjustment should have been al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alysis. He contended that TNMM applied by the assessee for comparability analysis was the most appropriate method in the facts and circumstances of the case and the AO/TPO was not justified in changing the same. Without prejudice to this contention, the learned counsel for the assessee submitted that even if CUP method is to be adopted as most appropriate method for comparability analysis, certain adjustments have to be made as per Rule 10B(1)(a)(ii). He submitted that the AO worked out the arithmetical mean of brokerage rate earned by the assessee from top ten FIIs by taking simple average which is not correct. He contended that arithmetic mean should have been worked out by the AO on the basis of weighted average to make a fair comparison. He submitted that similarly adjustment for marketing function at 0.073%, for research function 0.175% and for volume at 0.042% as claimed by the assessee should have been allowed by the AO/TPO. He submitted that the AO, however, allowed adjustment for marketing function only to the extent of 0.048% and after making the said adjustment to simple average arithmetic mean of 0.408% worked out the arm's length brokerage rate at 0.36%. He submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic mean of such rates taken by the TPO, we find that the first proviso to section 92C speaks about taking arithmetic mean of more than one ALPs determined by the most appropriate method. There is, however, nothing to suggest that volume of the relevant transactions also has to be taken into consideration for the purpose of computing such arithmetic mean. We, therefore, find it difficult to accept the stand of the assessee that weighted average arithmetic mean should be taken and not the simple average arithmetic mean. In our opinion, the learned CIT(Appeals), therefore, has rightly rejected the stand of the assessee on this issue holding that there is no provision in the statute which allows taking weighted average arithmetic mean for determination of arm's length price. 14. As regards the adjustments claimed by the assessee for marketing function, for research functions and for differences in volumes, it is observed that the relevant details and working have been furnished by the assessee at page No. 161 of the paper book in support of adjustment for marketing function, page No.200 and 211 of the paper book in support of adjustment for research function and paper book page No. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the same reasons as given by the AO. 17. We have heard the arguments of both the sides on this issue and also perused the relevant material on record. The learned counsel for the assessee has agreed that the amount in question cannot be allowed as bad debts as the condition stipulated in section 36(1)(vii) read with section 37(2) is not satisfied. He, however, has contended that the same is allowable as business loss. However, as rightly held by the authorities below in this regard, nothing has been brought on record by the assessee to show that the loss as a result of the loan given to the employee becoming irrecoverable was actually incurred in the year under consideration and this being so, we are of the view that the amount in question cannot be allowed even as business loss in the year under consideration. We, therefore, uphold the impugned order of the learned CIT(Appeals) confirming the disallowance made by the AO on this issue and dismiss ground No. 10 of the assessee's appeal. 18. As regards ground No. 11, it is observed that the issue raised therein relating to charging of interest u/s 234D is squarely covered by Explanation 2 to section 234D inserted by the Finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out by him at Rs.72,116/- by applying Rule 8D and disallowance to that extent was made by him u/s 14A. On appeal, the learned CIT(Appeals) confirmed the said disallowance. 24. We have heard the arguments of both the sides on this issue and also perused the relevant material on record. As held by the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT . Rule 8D is applicable prospectively from assessment year 2008-09 and for the years prior to 2008-09, the disallowance u/s 14A is required to be made on some reasonable basis. We, therefore, restore this issue to the file of the AO with a direction to recompute the disallowance to be made u/s 14A on some reasonable basis. We also direct the AO to consider the stand of the assessee that no expenditure was actually incurred for the purpose of making investment in shares so as to warrant any disallowance u/s14A. Ground No. 9 of the assessee's appeal is accordingly treated as allowed for statistical purposes. 25. As regards ground No. 10, the learned counsel for the assessee has agreed that the issue raised therein relating to levy of interest u/s 234D is to be decided against the assessee as the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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